What does 2017 hold for the Australian property market?

The Australian property market has been one of the best performers over the last few years despite doom and gloom headlines. Time and time again so-called “experts” have tried to talk down the Australian property market but to no avail. However, it does look as though 2017 could be a more challenging year for Australian real estate. So, what does 2017 hold for the Australian property market?

Slowing house price growth

The likes of Sydney and Melbourne have grabbed the attention for some time with regards to property investment. Over the last two years we have seen double-digit growth in Sydney house prices and Melbourne has not been too far behind. However, house prices in Sydney increased by just 3.2% in the year to September and 6.9% in Melbourne.

Set against Australian interest rate of 1.5% this is not exactly a dire performance, especially when you bear in mind the rental income, it is a reduction on the last couple of years. Indeed some experts are suggesting there could be a surplus of up to 100,000 apartment units in Australia’s larger in cities by 2018. Whether this forecast comes to fruition remains to be seen.

Property developments

A number of Australian banks have expressed concern at the potentially difficult trading conditions some property developers will face in the short to medium term. As we touched on above, it is the inner-city apartment market which is probably most at risk because it has been extremely strong of late and developers had hoped this demand would continue. As a consequence followers will note that the cost of borrowing has ticked higher over the last few months reflecting ongoing concerns.

The gradual increase in finance costs will, together with the potential oversupply in the short to medium term, significantly reduce the number of newbuilds across Australia’s major cities. In some areas this may cause some short-term weakness in prices but in the medium to longer term it will offer more support as supply will be reduced.

What does the future hold?

The fact that HSBC is predicting house price rises of between 4% and 6% for Sydney during 2018 and 2% to 4% for Melbourne is a good sign. These are markets which have often been labelled as “overvalued” but continue to perform admirably. Restrictions on foreign ownership and lending requirements have perhaps dampened demand in the short term but this impact should not be long-lasting.

It is worth noting that 49% of all property purchases in October were financed by mortgage as opposed to just 44% in December 2015. On one hand we may face a glut of property in some suburbs of Sydney and Melbourne but long-term demand for property in Australia remains strong. Many people will not be aware that Australia is the second wealthiest nation in the world as measured by wealth per adult. The now infamous immigration system also favours relatively young migrants with skills that are in short supply – people more likely to acquire their own property in the short to medium term.

Conclusion

Low interest rates, a controlled immigration policy, a strong economy and continued demand for property across the country bode well for the future. A shortage of suitable properties in some of the more desirable suburbs of Australia will continue to fuel competition and push prices higher. Experts may be predicting a glut of inner-city apartment but the ongoing reduction in property development activity and increased property development finance costs could deflate the development bubble we have seen of late.

Even if 2017 does turn out to be a year of consolidation for the Australian real estate market this will be no bad thing in the long term. Time and time again so-called “experts” have talked the market down only for investors, both domestic and overseas, to buy on the dips. There is no reason to see this changing in the short to medium term.